The "100 Percent Penalty": What You Need To Know About The Trust Fund Recovery Penalty (TFRP)

When the IRS tells a taxpayer that they are seeking to impose the Trust Fund Recovery Penalty (TFRP), the taxpayer had better take note immediately. TFRP is a gargantuan tax penalty that can be levied against almost anyone who is in charge of collecting taxes or handling funds for a company.


What Is The Trust Fund Recovery Penalty (TFRP)?

If a "person required to collect, truthfully account for and pay over any tax" for trust fund accounts (employer income tax withholding, Social Security tax, etc.) fails to collect the required tax, the IRS can impose a TRFP. The TFRP allows the IRS to collect not only the unpaid tax amount, but also a penalty equal to the unpaid tax amount. Essentially, this means that there is a 100 percent fine tacked on top of the tax bill. For this reason, TFRP is often referred to as the "100 percent penalty."

Under IRS regulations, this penalty can be imposed on a broad spectrum of people. Anyone who touches payroll or otherwise is responsible for collecting taxes or who has control over funds may be subject to this penalty, including business owners, managers, officers of a business and payroll employees.

With such a large penalty looming and so many people potentially liable for it, the stakes are extremely high whenever the IRS attempts to use TFRP on taxpayers.


What The IRS Is Supposed To Do

If the IRS seeks to use the TFRP, it is required to give the taxpayer notice that it is doing so. This notice usually takes the form of IRS Letter 1153, auto-populated with basic information about the taxpayer (name, etc.), so that the taxpayer knows the documents are meant for him or her.

According to internal IRS regulations, this letter should be sent to the taxpayer via certified mail. A copy of the certification showing that the letter was sent this way is supposed to be kept on file with the IRS.

Letter 1153 is typically sent along with two additional documents, one outlining the unpaid tax amount and proposed TFRP amount and one giving the taxpayer a summary of his or her rights and obligations in a TFRP situation.


A Recent Example Where The Taxpayer Fought Back

In a recent case, the IRS told a taxpayer that he had not paid the right amount of quarterly taxes, and then supposedly sent him Letter 1153. The taxpayer, a small business owner, said that he never got the letter. He fought back and claimed that if the IRS wanted to use the TFRP as it planned, the agency was required by law to give him proper notice.

The taxpayer's position was that he had never received proper notice from the IRS, so the IRS could not collect from him. The court agreed because:

  • The taxpayer "credibly testifies that he never received [the letter]."
  • There was no trustworthy record of the IRS ever mailing Letter 1153 to the taxpayer.
  • The only copy of a Letter 1153 in the IRS case file was "undated, unsigned and incomplete."
  • An IRS agent manually updated an entry in this case file with a note that said the letter was sent to the taxpayer. However, this note appeared nearly two years after the IRS system auto-populated an entry saying such a letter had already been sent. The court noted that the IRS agent's action was "an aberration from the IRS' normal practice and is highly unusual" and that it made the information logged by the system unreliable.
  • The IRS did not act in a manner consistent with having sent the taxpayer Letter 1153, as it did not follow its usual process for collecting TFRP within 60 days (instead waiting 21 months).

Why Does This Matter To You?

This situation highlights the importance of understanding how to address both the substance of a TFRP claim and the procedural elements that the IRS must satisfy to have a valid claim in the first place. Having the right help in this situation is critical. If you have received any communication from the IRS stating that you are responsible for TFRP payments, seek help from someone who can explain how to protect your interests and minimize or eliminate the damage the IRS can cause.

Let us help you learn about your options and stand up to the IRS - contact us for a free case evaluation before the IRS forces you into a payment you may be able to reduce or even eliminate.